Balancing Discounts Against Value-Added Offers: Which Do Shoppers Prefer?

By Christine Kern, contributing writer

Should hotels offer value-added or flat discount offers to customers?

A study by researchers at the University of Minnesota found that shoppers prefer value-added offers over flat discounts, but when given a choice will often choose the discount. The survey found that consumers often are not doing the basic math, and assume that the discount is the better deal. When applied to the hotel industry, the study’s findings suggest that value added packages protect a hotel’s reputation and will attract guests who are willing to pay for quality.

The team of researchers, led by Akshay Rao of the University of Minnesota’s Carlson School of Management, discovered that shoppers prefer getting something extra free to getting something cheaper. The main reason is that most people are useless at fractions.

For example, the study cites, consumers do not understand that a 50 percent increase in quantity is the same as a 33 percent discount in price. They overwhelmingly assume the former is better value. In one experiment, researchers sold 73 percent more hand lotion when it was offered in a bonus pack than when it carried an equivalent discount.

The study found this trend to be consistent, even when the deal clearly favored the discounted product. In another experiment, Rao offered two deals on loose coffee beans: 33 percent extra free or 33 percent off the price. The discount is by far the better proposition, but the supposedly clever students viewed them as equivalent.

Further studies have shown other ways to exploit the consumer’s innumeracy. One is through double discounting to confuse their math skills. For instance, people are more likely to see a bargain in a product that has been reduced by 20 percent, and then by an additional 25 percent, than one which has been subject to an equivalent, once-off, 40 percent reduction. In actuality, these discounts are equal in value.

So what does this mean for the hospitality industry? An article from eHotelier explains that individuals shop for hotel accommodations the same way they shop for other items, which means that the above logic applies. Patrons are going to look for value in their purchase, either through a promotional package or a discounted rate, to drive their reservations. By applying the principles from the study, offering multiple options to guests can help them take the offer that appears to provide the greatest savings, even when they don’t.

The eHotelier article suggests that offering value added packages to guests can help build a hotel’s reputation and will sell better than a discounted rate and attract guests who are willing to pay for the quality of the hotel, benefiting the brand and growing brand loyalty in the long run.